Dan Alperthttp://www.businessinsider.com/category/dan-alpert
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http://www.businessinsider.com/perhaps-this-is-the-week-that-fewer-people-listen-to-nonsense-on-europe-2011-11Time To Stop Bandaging The Festering Wounds In Europehttp://www.businessinsider.com/perhaps-this-is-the-week-that-fewer-people-listen-to-nonsense-on-europe-2011-11
Wed, 30 Nov 2011 10:43:39 -0500Daniel Alpert
<p><img style="float:right;" src="http://static3.businessinsider.com/image/4ed64dbbeab8ead14200003a/curvy-knife.jpg" border="0" alt="Curvy Knife" /></p><p>This may well turn out to be the week during which the markets finally break the repeated rally on rhetoric pattern that has previously given the &ldquo;Euro-crats&rdquo; more than their fair share of opportunities to delay meaningfully addressing European imbalances.</p>
<p>While over the weekend still more bandages were being prepared to cover festering financial-economic wounds &ndash; partial guarantees of short term issuance through the Emergency Financial Stability Fund (EFSF); the final EFSF guidelines that unsurprisingly come up well short of what had been rumored in the market; another market rumor of an International Monetary Fund (IMF) bailout of Italy (using more money than the IMF has available for worldwide operations);&nbsp;and side pacts between Germany and France to foster fiscal union &ndash; they amount to more of the same refusal to take on the complex surgery needed to cure the systemic failure.</p>
<p>For the stark reality is that the earnest, although impractical, European experiment with a fiscally-unconsummated union has come up against events &ndash; unforeseen and unintended &ndash; that require far more than plasters and the Saxon-style dogmatic solutions that, sadly, are as equally impractical as the initial implementation of the European Monetary Union (EMU) itself.</p>
<p>Finger pointing helps even less.&nbsp; Less still, the passing of austere judgment on the hopelessly indebted nations across the southern tier of the Eurozone.</p>
<p>Over the long weekend here in the U.S., with the passing of The New York Times' Tom Wicker, I happened to re-acquaint myself with Wicker's legendary reportage of the day President John F. Kennedy was assassinated in Dallas.</p>
<p>Had he lived, President Kennedy would have given a speech that day in which he was slated to say the following about the fiscal austerity advocated by "so-called" conservative voices in the U.S. south. The circumstance and subject matter were certainly different from those of present day, but the words are oddly appropriate - albeit with some interpretive editing, as below:</p>
<p style="padding-left: 30px;">"There will always be dissident voices heard in the land, expressing opposition without alternatives, finding fault but never favor, perceiving gloom on every side and seeking influence without responsibility....</p>
<p style="padding-left: 30px;">...But today other voices are heard....voices preaching doctrines wholly unrelated to reality....which apparently assume that words will suffice without weapons, that vituperation is as good as victory....and that peace is a sign of weakness...</p>
<p style="padding-left: 30px;">...[T]hey see that debt as the greatest single threat to our security. At a time when we are steadily reducing the number of...employees serving every thousand citizens, they fear those supposed hordes of civil servants far more than the actual hordes of opposing armies.</p>
<p style="padding-left: 30px;">We cannot expect that everyone....will 'talk sense to the...people.' But we can hope that fewer people will listen to nonsense."</p>
<p>While I apologize for the digression, the focus of the core states on fiscal austerity implicitly assumes that talk is more powerful than the real economic "weapons" that would enable a viable solution. And that railing against and condemning the "club med countries" for what certainly was a collective action problem involving grievous error on the part of both borrower and lender, is better for the entirety of the Eurozone than making peace and resolving differences in manner mutually acceptable to debtor and creditor sovereigns, if not to that of their respective financial institutions.&nbsp;</p>
<p>So let's move past the acronymic half-measures and "nonsense" we are met with each week from of stewards of the European crisis, and risk talking sense "to the people" - in Kennedy's words - as follows:</p>
<ul>
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<p>As is the case in with the developed (debtor) world versus the emerging (creditor) nations, the peripheral countries of the Eurozone must again become competitive with the core in order to reverse their continuing current account imbalances.&nbsp; This simply cannot be accomplished through austerity/internal devaluation in the periphery &ndash; which is impractical from political, social and economic perspectives.</p>
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<p>European institutions are severely limited in their capacity to materially bolster overall demand in a manner to improve the needed competitiveness outside of the core.&nbsp; It should be massively clear to all that the <a class="hidden_link" href="http://www.businessinsider.com/blackboard/european-central-bank">European Central Bank</a> (ECB) needs to swiftly cut its funds rate to a level consistent with that of other major central banks and I would go so far as to insist that it is long past time for the ECB to throw in the towel on the monetization of weak sovereign debt (at a haircut, putting a floor at current market values).&nbsp; But these moves, necessary as they are, will devalue (more accurately &ldquo;tank&rdquo;) the Euro universally (that is, across the EMU), setting off a degree of universal inflation (particularly in energy and other imports) across the zone.</p>
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<p>Therefore, I am not particularly sanguine that either of these two actions will grow broad money in the peripheral countries, as I continue to believe that the global excess of supply (of labor, productive capacity, and capital) relative to aggregate global demand, is (to say nothing of the debt overhang itself) a crimp on additional investment and therefore any meaningful multiplier that would produce sustainable inflation.</p>
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<p>If sustainable inflation will not occur &ndash; much as it has failed to occur here in the U.S. despite extraordinary monetary accommodation/monetization &ndash; because wages will not track sufficiently to ensure the sustainability of price increases (other than of commodities and other money substitutes, which merely retards other spending if wages don't cooperate) then the hoped for general reflation of the target economies, in a manner that lessens the real impact of their extraordinary debt burdens, will not occur.</p>
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<p>As my friend and colleague Sherle Schwenninger of the New America Foundation points out, general monetary reflation aimed at generating inflation also has major constraints, because one can not necessarily engineer relative inflation, higher inflation in the core than in the periphery.&nbsp; But that is what one would need to do in order for competitiveness of the peripheral economies to improve.</p>
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<p>As a result, even for those of us who have become proponents of ECB easing and monetization (being resisted by Germany and many others in the core &ndash; save the French in their heart-of-hearts) the best we can hope for is improvement in "universal" Eurozone competitiveness as the result of a fallen Euro. This benefit would be shared (minus the inflationary impact on imports, and tempered as well by global macro imbalances) among zone members relative to the rest of the world, but would not sufficiently reshuffle the relative internal competitiveness within the zone.</p>
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<p>Since internal devaluation is an impractical pipe dream (we saw, this past Friday, Greece seek to obtain yet additional principal forgiveness of its debts) it has become much more likely, than generally hoped for of late, that that the only way to true devaluation in the southern tier takes us to the zonal exiting of some of the peripherals and the disclaiming of their Euro-denominated obligations in favor of repaying with a deeply devalued local currency.</p>
<p>Of course I am tossing out as unrealistic the permanent southward life support alternative (in which the core merely subsidizes the &ldquo;club med&rdquo; countries ad infinitum), which I can't see as being politically worth discussing.&nbsp; And I am assuming that a &ldquo;drachma-tized&rdquo; Greece, for example, would take advantage of the default on/devaluation of its Euro obligations to attract investment and grow production.</p>
<p>As long as the southern economies remain in the euro-zone, currency devaluation for these economies remains out of the question for obvious reasons.&nbsp; Any devaluation becomes universal (which, it might be added, pushes the cost of adjustment off on the United States and other major economies outside Europe).</p><p><a href="http://www.businessinsider.com/perhaps-this-is-the-week-that-fewer-people-listen-to-nonsense-on-europe-2011-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/german-economists-dont-really-believe-hyperinflation-is-possible-2011-11German Economists Don't REALLY Believe Hyperinflation Is Possiblehttp://www.businessinsider.com/german-economists-dont-really-believe-hyperinflation-is-possible-2011-11
Thu, 17 Nov 2011 11:24:00 -0500Daniel Alpert
<p><img style="float:right;" src="http://static1.businessinsider.com/image/4ec534a269beddc362000034/germany-protest-angela-merkel-euro.jpg" border="0" alt="Germany Protest Angela Merkel Euro" /></p><p>I am convinced that each time the &euro; comes under pressure the Germans start screaming &ldquo;NEIN, PRINT NICHT!&rdquo;&nbsp; They are <a href="http://www.bloomberg.com/news/2011-11-17/merkel-rejects-french-calls-to-deploy-ecb-as-crisis-backstop-on-euro-debt.html" onclick="javascript:_gaq.push(['_trackEvent','outbound-article','www.bloomberg.com']);">at it again today</a>.</p>
<p>As far as the German government is concerned, the <a href="http://www.businessinsider.com/blackboard/european-central-bank" class="hidden_link">European Central Bank</a> is not, like other central banks, ever to be considered a lender of last resort.&nbsp;</p>
<p>And in the absence of fiscal union, I suppose that is understandable &ndash; however impractical the alternatives.</p>
<p>But there can&rsquo;t really be many, at senior economic policy levels in Germany,&nbsp;<strong>who honestly believe that&nbsp;forced internal devaluation in the Club Med&nbsp;nations&nbsp;will actually happen</strong>. Modern nations typically don&rsquo;t tolerate austerity other than at the point of a bayonet.</p>
<p>I have therefore concluded that they are planning to shrink the zone and have Greece [and Portugal?] exit (at least initially).&nbsp; There have been indications for weeks now that planning is commencing along these lines in Berlin.</p>
<p>Here&rsquo;s the thing.&nbsp; I do not think that other than with respect to energy, Germany would see much inflation &ndash; it is just too hard to generate sustainable inflation in the developed world with the excess global labor and productive capacity (and capital) that will remain with us for years.</p>
<p>The media chalks this all up to Germany&rsquo;s fear of 1923 (hyperinflation).&nbsp; But I really don&rsquo;t think&nbsp;solid German economists&nbsp;really believe that is possible.&nbsp; I had breakfast with a very influential private sector German economist a couple of weeks ago and it&nbsp;was certainly&nbsp;clear to him that inflation should be the least of&nbsp;Germany&rsquo;s fears (not mentioning names out of courtesy).</p>
<p>And a cheaper Euro will redound to everyone&rsquo;s benefit in Europe from a trade standpoint (albeit, the German&rsquo;s will have to share that trade benefit because the devaluation will be universal across the zone).</p>
<p>No, it&rsquo;s not inflation.<strong> </strong>It&rsquo;s not (that much at least) trade.&nbsp; <strong>I see&nbsp;Germany as being primarily concerned with the global value of their assets and savings.&nbsp; The fact is that if you&nbsp;are a country of&nbsp;prudent savers, with&nbsp;a 10% savings rate and high levels of equity in real assets, you kind of don&rsquo;t want to see your currency devalued.</strong></p>
<p>Add to that the fact that austerity-policy-based troika bailouts redound to the benefit of the ECB and core banks (as money injected into Greece, for example, mostly round-trips back to core creditors &ndash; with the IMF and other non-EZ&nbsp;money essentially being a freebie), and it&rsquo;s really &ldquo;all about me&rdquo; from the German point of view.&nbsp; The French banks benefit too, but the French government&nbsp;sees the foolishness in&nbsp;pursuing an unattainable goal.</p>
<p>If austerity and internal devaluation is unrealistic, printing and universal devaluation is &ldquo;verboten,&rdquo; and the German taxpayers are certainly not going to start sending money south with no strings attached, the answer can only be default and exit in whatever of the periphery can&rsquo;t make it.</p>
<p>As for the currency (Euro), either through strengthening internal purchasing power of the $, already underway as disinflation is firmly back in the U.S., through the ECB actually printing&nbsp;&euro; and buying Club Med bonds, and/or through disorderly default/exit &ndash; or a combination of the foregoing effects &ndash; the Euro will devalue relative to the Dollar.</p>
<p>Essentially, it must.</p>
<p><em>This <a href="http://www.economonitor.com/danalperts2cents/2011/11/17/on-printing-euros-and-the-real-german-fear-hint-its-not-1923/" target="_blank">post</a> originally appeared at <a href="http://www.economonitor.com" target="_blank">Dan Alpert's Two Cents</a>.</em></p><p><a href="http://www.businessinsider.com/german-economists-dont-really-believe-hyperinflation-is-possible-2011-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/a-closer-look-at-gross-domestic-product-2011-10Hidden In The GDP Data Are Omens Of A Bad Christmas Aheadhttp://www.businessinsider.com/a-closer-look-at-gross-domestic-product-2011-10
Fri, 28 Oct 2011 11:53:25 -0400Daniel Alpert
<p><img style="float:right;" src="http://static4.businessinsider.com/image/4d121a354bd7c8423a2f0000-401-300/grinch2.jpg" border="0" alt="Grinch2" width="401" height="300" /></p><p>I spent most of yesterday, like many of you, enjoying the &ldquo;Beautiful Day&rdquo; response of the markets to the Merkozy Miracle (yes, Angela did a good job, of course its a default, the creditors got away with a bit more than they expected, the EFSF structure is not [yet?] viable, CDS may still trigger but not right away, and no &ndash; Greece is not going to &ldquo;make it&rdquo;).&nbsp;</p>
<p>It was not until last night that I dove deeply into the GDP data.&nbsp;</p>
<p>The markets trade on headlines, confidence and momentum. Macroeconomic data is &ndash; after all &ndash; so tedious. To those of us willing to toil, Europe is merely one component of a global macroeconomic re-balancing that is extremely painful and complex, and is thus prone to&nbsp;rolling crises that each seem to be the&nbsp;critical challenge obstructing&nbsp;the economic recovery of the developed world but are merely symptomatic of a greater illness.&nbsp;</p>
<p>The headline GDP data from Q1 and Q2 (upon revision) gave the world pause, just as it did notions of a U.S. recovery.&nbsp; Similarly, the advance GDP headline number for Q3 would seem to make it look as though&nbsp;arguing&nbsp;that the U.S.&nbsp;economy might contract in the&nbsp;short term is not reasonable.</p>
<p>As always, however,&nbsp;the GDP number requires some parsing. So let&rsquo;s have a peek and where the headline 2.5% came from (all in real terms &ndash; inflation-adjusted):</p>
<p>First &ndash; two contrasting figures -</p>
<ul>
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<p>Personal Consumption Expenditures (PCE) &ndash; what we all spend as individuals &ndash; accelerated smartly at an annal rate of 2.4% (good relative to Q2&prime;s 0.7%).</p>
</li>
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<p>Disposable Personal Income (DPI) &ndash; what we have left to spend after tax payments &ndash; <strong>declined</strong> 1.7%.&nbsp; This was the first decline since Q4 2009.</p>
</li>
</ul>
<p>This of course caused the savings rate to decline dramatically to the lowest level (4.1% of DPI)&nbsp;since the recession kicked it back up to the 5% to 6% range. This means that the growth in PCE was being fueled by the worst possible source &ndash; dis-saving (more debt that is, plastic and installment).</p>
<p>It would be one thing if DPI was rising, and the consumer felt confident enough to borrow a bit more out of confidence.&nbsp; But, as recent post-recession-low consumer confidence data has demonstrated, the consumer is&nbsp;not seeing&nbsp;happy days.</p>
<p>As I <a href="http://www.economonitor.com/danalperts2cents/2011/09/26/warning-stagnant-wages-can-support-only-so-much-consumer-debt-we-appear-to-have-hit-the-ceiling-again/">wrote last month</a>&nbsp;2011 has been characterized by the first sustained growth in consumer credit since the Great Recession (actually, it began in Q4 2010) which peaked at a three month moving average of +0.4% in July, before dropping precipitously to +0.19% in August. The Q3 GDP data just makes clearer the source of growth that we already picked up in consumer credit data.</p>
<p>Consumer confidence poll data, not surprisingly, shows a worried consumer because he has just tapped herself out again (and we know that with even greater clarity as of yesterday&nbsp;because the biggest contributors to PCE growth were household services (added 1.43% to GDP), recreational goods and vehicles (&ldquo;<a href="http://www.metrolyrics.com/summer-nights-lyrics-grease.html" onclick="javascript:_gaq.push(['_trackEvent','outbound-article','www.metrolyrics.com']);">Summer dreams, ripped at the seams &ndash; but, oh, those summer nights</a>&ldquo;) and the perennial favorite, healthcare.</p>
<p>Government spending, I suppose thankfully,&nbsp;went flat instead of eating heavily into GDP as it did in Q4 2010, and&nbsp;Q1 and Q2 2011. The only really nice thing was industrial, transportation and other (non-IP) equipment, <em>but overall private direct investment contributed less than in Q2</em>.</p>
<p>So the consumer decided to enjoy summer apparently.&nbsp; And now he is in a foul mood because he&rsquo;s maxed out again and real disposable income went negative. &nbsp;And all this amidst still weak jobs numbers and declining real wages.</p>
<p>The proof of the pudding will be the Xmas season.</p>
<p>But here&rsquo;s what I am seeing in that regard:&nbsp; Asian exports are down in Hong Kong, Singapore, Taiwan, Korea and,&nbsp;perhaps even&nbsp;China as well (although I am still crunching data on the latter).&nbsp; Falling Asian exports was one of the canaries in&nbsp;the coal mine&nbsp;in 2008 by the way.&nbsp; And I don&rsquo;t think we&rsquo;re suddenly making toys for Santa&rsquo;s sleigh in the U.S. by the way.</p>
<p><em>This <a href="http://www.economonitor.com/danalperts2cents/2011/10/28/under-the-covers-with-gross-domestic-product-what-might-be-missing-from-santas-sleigh/" target="_blank">post</a> originally appeared at <a href="http://www.economonitor.com/danalperts2cents/" target="_blank">Dan Alpert's Two Cents</a>.</em></p><p><a href="http://www.businessinsider.com/a-closer-look-at-gross-domestic-product-2011-10#comments">Join the conversation about this story &#187;</a></p>